Asset portfolio securitizations and cyclicality of regulatory capital |
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Authors: | Kristina Lützenkirchen Daniel Rösch Harald Scheule |
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Institution: | 1. Institute of Banking & Finance, Leibniz University of Hannover, Königsworther Platz 1, 30167 Hannover, Germany;2. Department of Statistics and Risk Management, University of Regensburg, 93040 Regensburg, Germany;3. School of Finance, University of Technology, Sydney, PO Box 123, Broadway, NSW 2007, Australia |
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Abstract: | This paper analyzes the level and cyclicality of regulatory bank capital for asset portfolio securitizations in relation to the cyclicality of capital requirements for the underlying loan portfolio as under Basel II/III. We find that the cyclicality of capital requirements is higher for (i) asset portfolio securitizations relative to primary loan portfolios, (ii) Ratings Based Approach (RBA) relative to the Supervisory Formula Approach, (iii) given the RBA for a point-in-time rating methodology relative to a rate-and-forget rating methodology, and (iv) under the passive reinvestment rule relative to alternative rules. Capital requirements of the individual tranches reveal that the volatility of aggregated capital charges for the securitized portfolio is triggered by the most senior tranches. This is due to the fact that senior tranches are more sensitive to the macroeconomy. An empirical analysis provides evidence that current credit ratings are time-constant and that economic losses for securitizations have exceeded the required capital in the recent financial crisis. |
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Keywords: | Asset-backed security Economic downturn Impairment Regulation Regulatory capital Mortgage-backed security |
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